Insurance stalls revival

Insurance thicket imperils comeback: Shuttered since Katrina hit, a French Quarter institution's losses mount during haggling on its claims. Such woes are ubiquitous in Louisiana.

By Howard Witt, Tribune senior correspondent

5:03 p.m. EDT, May 8, 2013

There were 11,256 bottles of wine in the cellar of Antoine's Restaurant on the morning of Aug. 29 when Hurricane Katrina struck, some of them rare, most of them expensive and all of them ruined when the power failed, the air conditioning died and the ruinous heat and humidity of late-summer New Orleans could no longer be kept at bay.

Yet the restaurant's managers say the insurance company that covered the wine cellar, rather than quickly settle a claim for the value of the entire collection, proposed haggling over the cost of each bottle as the restaurant seeks to replace it--a painstaking process they expect will take years.

Meanwhile, each day the landmark French Quarter restaurant remains closed while struggling to repair storm damage and reassemble its staff--it has been more than 100 days and counting--Antoine's loses more than $17,000 in potential revenue. Yet the managers complain that the insurance company that provides the restaurant's business-interruption coverage has advanced only $250,000 so far toward the loss, which likely will exceed the policy's limit of $1.9 million.

"They sell you business-interruption insurance to keep you from going out of business in a catastrophe, but it turns out that's not how it works," said Rick Blount, Antoine's chief executive officer and the great-great-grandson of the restaurant's founder, who is hoping to reopen by Christmas Eve. "It will eventually pay, but not in time to save your business."

The next great tribulation

After the winds, the floods, the deaths and the massive destruction, the battle over insurance claims has emerged as New Orleans' next great tribulation. The city's silent, dust-blown streets, lined with 110,000 ruined houses, still await the return of three-quarters of the exiled population, as well as the reopening of marquee attractions such as the convention center, the Superdome, the fabled streetcar lines and three-quarters of the restaurants. And insurance problems are one major reason the gears of the recovery seem so clogged.

It's not just Antoine's, a bellwether New Orleans institution whose effort to revive itself mirrors the halting resurrection of the city it has served for 165 years. State officials warn that 4 in every 10 Louisiana small businesses, starved for cash flow, face failure while waiting for their insurance claims to be settled. Emergency loans from the federal Small Business Administration are barely trickling in: Fewer than 8,000 loans had been approved by mid-November, out of more than 200,000 Katrina-related applications.

Allstate Insurance Co., the second-largest insurer in the state, had managed to close 58 percent of its Katrina-related claims as of early December, more than three months after the storm.

"It's definitely overwhelmed the insurance industry as a whole, so things are moving slowly," said John O'Brien, a New Orleans insurance broker who specializes in writing policies for historic French Quarter businesses, including Antoine's. Ultimately, insurance industry experts predict that insurers will pay out more than $40 billion for damage caused by Hurricane Katrina. Yet thousands of policyholders who have received their insurance checks find themselves fighting over settlements they perceive as too low and unfair. The state insurance commissioner's office has logged more than 26,000 inquiries from policyholders and received nearly 1,700 formal complaints so far.

More ominously, an estimated 60 percent of homeowners and business operators across the state carried no flood insurance and face the looming expiration of grace periods on mortgages for properties that in many cases no longer exist.

`False sense of security'

"People got lulled into a false sense of security over the last 40 years," said Robert Wooley, the Louisiana state insurance commissioner, noting that many homeowners assumed that the levees would protect them.

"It's just human nature," added Wooley, who lives in Baton Rouge, the state capital. "I'm the insurance commissioner and I'm underinsured. I don't have flood insurance. But if the Mississippi River levee breaks, this whole area is gonna flood. I'm taking a chance like everybody else."

Even those New Orleans residents with flood insurance who are satisfied with their settlements and would like to begin rebuilding are hobbled by multiple uncertainties. They're unsure whether they should try to elevate their houses to protect them against a future flood. They don't know whether they'll be able to afford new insurance coverage, or if it will even be available. They are waiting for local and state officials to decide whether their neighborhoods will be condemned and turned into flood plains.

Congress and the White House have given them little confidence that the federal government will provide the tens of billions of dollars necessary to build a better system of levees and floodgates to protect this below-sea-level city against future killer hurricanes.

"We're caught here between people wanting to return and an economy that needs to recover," said Michael Olivier, secretary of the Louisiana Department of Economic Development. "But the level of devastation is creating a huge uncertainty, and without rebuilding the levee system to a more secure degree, it will absolutely impact the confidence of business and investment to return to the city."

The absence of that confidence can be seen on the drive along Canal Street from Antoine's to Charles Daroca's house in the city's Lakeview neighborhood.

Cemetery of ruined homes

Before Katrina, the pleasant 5-mile drive took Daroca, the restaurant's chief financial officer, through tree-lined neighborhoods past an encyclopedic sampling of New Orleans' distinctive housing styles: Victorians and bungalows, shotguns and duplexes, housing projects and McMansions.

Nearly every one of those homes flooded when the hurricane burst the city's protective levees. Today, Daroca's drive traverses a cemetery of ruined and abandoned homes, most still filled with mud and mold and the putrefying contents that used to be furniture, clothing, books and pictures.

Yet outside every fifth house or so, a reeking pile of sodden wallboard, lumber and other debris spills onto the street--a sight that boosts Daroca's spirit.

"Those people are gutting their houses," he explained. "It means they want to rebuild."

Daroca, 46, a lifelong New Orleans resident, wants to rebuild his 4,400-square-foot Lakeview home, which steeped for weeks in 10 feet of water. He's spent every weekend for the past two months in a mask and gloves, tearing out the first floor to the joists and the walls back to the studs, stripping his beloved home down to its skeleton so the mold would stop growing and restoration could begin.

But Daroca, his wife and their two children, exiled for now in a rented townhouse in the New Orleans suburb of Destrehan, have decided to wait before taking any further steps. The problem is not money: Daroca had $250,000 in flood insurance and has received his settlement check, which he calculates should cover the cost of the repairs. The problem is uncertainty.

There still is no electricity in Daroca's blighted neighborhood. Only a handful of Daroca's neighbors have indicated that they intend to return. There are no functioning schools or stores or groceries or coffeehouses for miles.

"I live in a flood zone, but I don't know if my neighborhood will be protected in the future," Daroca said. "I don't know if my house has to be raised. What do I have to do? The frustration of it is, there is nowhere to go for answers, no official to ask what you can do."

Will insurers jump ship?

Another kind of ambiguity looms over the areas of Louisiana and Mississippi hit hardest by Katrina: whether insurance will be available, and affordable, in the future. Already the chairman of Northbrook, Ill.-based Allstate has indicated that his company is planning to reduce its exposure in the region, through a combination of approaches that could include new-business moratoriums and higher premiums.

"We think the risk is too great and too unpredictable," said Michael Trevino, an Allstate spokesman. "We can't charge the right amount of premium to collect in order to pay claims."

State Farm, the largest insurer in Louisiana with nearly 35 percent of the homeowners business, has said it still is writing new insurance policies, but premium rates are under review.

"I think if we do the right thing--make the insurance companies pay what they are supposed to pay, but don't try and make them pay something they weren't obligated to pay--I think they'll stay here," Wooley said. "But premiums are going up, there's no doubt."

What concerns Wooley--and the insurance industry--are proposed laws and lawsuits, like one filed by Mississippi's attorney general, that seek to force insurance companies to pay claims for flood damage under homeowners policies if the policyholders did not have separate flood insurance. That federal flood insurance, which is underwritten by the National Flood Insurance Program and capped at $250,000, is required for homebuyers in some low-lying areas to obtain a mortgage, and optional for everyone else.

Supporters of such efforts argue that the flooding was caused by storm surges and levee breaches directly attributable to Katrina's winds, and wind damage is covered under homeowners insurance. Moreover, they contend that the federal government's own flood plain elevation maps did not require the purchase of flood insurance in many of the areas that ended up submerged.

The insurance industry strongly disputes that it should be liable for flood claims when every policy contains language explicitly excluding floods.

For some, opportunity knocks

For all the tension over insurance issues, there are a few pioneers who have discovered unimagined opportunities amid the confusion and the ruins. Margaret Maher, a single mother of two elementary school children who lost all her belongings when her rented house was destroyed in the flooding, is about to buy her first home, thanks to Katrina.

The five-bedroom house, in an upscale subdivision in St. Bernard Parish adjacent to New Orleans, was valued at $324,000 before floodwaters filled it and every other house nearby to the first-floor ceiling. Now the first floor is stripped bare to the studs, like Daroca's home, awaiting reconstruction.

Maher, 32, the human resources manager at Antoine's, never could have afforded such a home before the hurricane. But the peculiarities of post-Katrina economics are now working in her favor.

The home's owner got a $250,000 settlement from his flood insurance and is selling the distressed property to Maher for $101,000, meaning he walks away better than whole. Maher, meanwhile, can obtain a special low-interest Federal Housing Administration loan, available to victims in disaster areas, for enough to cover the purchase price and $55,000 in necessary repairs--and her monthly payment will be only $200 more than she was paying to rent a much smaller place.

Maher knows it may take years before her withered new neighborhood looks anything like the kid-friendly place it was before the hurricane--to say nothing of the devastated parish as a whole. But she says she's endured other crises in her life before Katrina--a serious illness, the premature birth of her son--and she prefers to remain optimistic.

"This neighborhood is going to come back strong," Maher said. "Sure, our life will be limited for a while. But it's limited now. At least we will have a house. At least that will be normal."